There are many ways to finance your small business or start up, and the market for small business finance is booming in 2016. Now is the best time to start and grow a small business, let’s explore 5 proven ways to get the business funding you need.
The traditional commercial loan is typically available to more mature companies with provable revenue and profitability, an asset base to collateralize the loan, and sustainable contractual revenue against which to measure loan coverage. Commercial credit lines are typically larger in size, with lower interest rates and longer terms, and are typically extended to companies that have large business deposit relationships with the bank.
Unfortunately, commercial lines of credit are rarely available to small businesses or start ups, unless the personal credit of the owner is very strong, in which case the bank will require personal guarantees of the principals, and possibly a pledge of personal collateral or property.
Owner Credit Line
A very common means of financing a small business, especially a one owner or two owner business, is through the use of a proprietor business line. This is the use of the personal credit of the business owner to acquire a single, or multiple lines of credit from on or more consumer credit companies.
This form of finance is a quick and easy means of financing a start up or small business, can typically be done without the need of a business plan, business revenues or assets or other time consuming processes. The financing is based on the personal credit of the business owner, and based on that credit, small to mid sized financing increments are obtained simultaneously from a number of consumer credit companies.
Many of these companies offer introductory rates, even 0% interest for the first year, and can be a quick and highly effective way to fund your business. You need to work with a seasoned professional when implementing this strategy due to the complexities of working with several consumer credit providers at the same time without causing harm to your credit. Companies, like our sister company Stage 1 Funding, have become leaders in the field of small business finance.
Another very common, and attractive form of business finance is accounts receivable finance. This type of finance is for businesses who generate invoices to their customers but must wait a period of time for those invoices to be paid. Many times, customers do not pay their bills until 30 days or more, with larger companies taking 90 or even 120 days to pay their bills, choosing to utilize the power of their brand to take advantage of the time value of money, or “the float”.
This creates a double edged sword for the small business owner. On the one hand, every small business owner would love to have a large company purchasing its products or services, however, not getting paid right away can put tremendous financial stress on a small business. Payroll is due every week, or every other week, rent is due, and the business owner has to draw compensation to pay personal bills as well. The small business owner cannot pay his bills in 90 days, so he or she is caught in a cash flow crunch between payables and receivables.
By utilizing invoice financing, or accounts receivable financing, the small business owner can borrow against his accounts receivable, getting his money within a matter of a few days, and then when the invoice is paid by his customer, the loan is repaid from the proceeds of the invoice. There are a number of companies that offer this type of business financing, and our firm has a strong team dedicated to this type of finance. Talk to your Legion financing professional to see if your business qualifies for this type of business loan.
A business that needs new equipment to grow can look to finance that growth through leasing or financing. Similar to leasing a car, business equipment, ranging from trucks and large equipment to computers, telephone systems and smaller assets, can be leased or financed through a number of equipment finance companies. This is a sound means of business finance, however, there are certain pitfalls to this type of finance. Interest rates can be very high, and sometimes hidden in an equipment lease, there is typically a cash down payment required for this type of financing, and many times the personal credit or guaranty is needed from the business owner to secure equipment financing.
Furthermore, leasing or financing equipment is limited to the purchase of an actual asset, and does not provide working capital or general funding for the business. Nevertheless, equipment financing can be an integral part of the overall “capital stack” of your business, particularly when used in conjunction with one of more of the other financing methods discussed in this article.
In 2012, the U.S. Congress pass the JOBS Act, landmark legislation that opened the door to an entire new industry on small business finance. Crowdfunding is booming, and many companies are being funded through social media, digital marketing and other forms of direct marketing, by the general public. Billions of dollars have been raised for business growth through crowdfunding, and business owners are turning more and more to this public finance mechanism for their business finance needs.
There are many types of crowdfunding, from “pre-sales” of new products to the actual sale of stock, or the issuance of notes or debt in your business. However, if you are considering using crowdfunding for your business, be aware that Crowdfunding is a highly regulated industry, regulated by the Securities and Exchange Commission, and should only be undertaken with the assistance of legal and financial professionals.
Legion Capital Corporation owns and manages one of the most advanced crowdfunding platforms in existence. With a database of over 6 million potential investors, the Legion Funding Platform is a potential viable option for companies that have reached a point of maturity that financing through the public might be a viable option.
There are many ways, some new, some old, to finance your small business. We have touched on only a few in this article, but there are others, including SBA loans, “friends and family” rounds of finance, IPO or public offering, real estate finance and others. The bottom line is this. Work with a professional who can help you identify and procure the most effective form of business funding for you. The financing professionals at Legion Capital and Stage 1 Funding have over 50 years of experience working with small business owners, and our team has helped thousands of small business owners start and grown their business. Contact us today at [email protected] or (888) 403-FUND.
About the Author: James Byrd is the CEO of Legion Capital Corporation, a direct to market venture, crowdfunding and advisory firm specializing on small business growth and capital formation.